The UAEs much-anticipated consumer credit bureau, began issuing the first reports to banks that have subscribed to access its services in early September.
Known as the Al-Etihad Credit Bureau, the entity aims to improve the reputation and long-term outlook of the countrys banking sector. It offers consumer credit reports to banks and financial institutions that have submitted historical credit data to the bureau, allowing lenders to know exactly how much existing and potential customers owe to other financial institutions in the UAE.
The reports also include an analysis of payment behaviours for the previous two years.
The opening of the bureau is intended to encourage more responsible lending and borrowing, avoiding a repetition of the 2008-09 financial crisis that left highly indebted consumers unable to make their loan or credit card repayments and created gaping holes in the balance sheets of banks.
There have been previous attempts to establish a credit bureau in the UAE, but this is the first time such an institution has been set up with the backing of the central bank and the Finance Ministry. In 2006, plans were announced to establish Emcredit, a credit information company to be based in the Dubai International Financial Centre.
Emcredit never really got off the ground, partly due to the lack of involvement from the central bank, which would have improved the collection of customer information from financial institutions. The entity also lacked comprehensive coverage of the whole UAE. Despite the failings of Emcredit, the need for a credit bureau has persisted.
Need for bureau
Personal lending is beginning to ramp up again as the UAE economy rebounds from the financial crisis, making the need to learn the lessons of the past even more pertinent.
Consumer credit grew by 6 per cent in the first half of 2014, reaching AED295.9bn ($80.6bn), which is edging closer to the growth rates seen just before the financial crisis. In the first three months of 2008, prior to the crash, personal loans increased by 11 per cent, compared with the end of 2007. The growth rate fell sharply in 2009 as financial markets stalled, projects ground to a halt and a large number of expatriates left the country leaving their debts unpaid.
The UAE has already taken steps to curb excessive borrowing, with the introduction of caps on bank mortgage lending announced in late December 2012. At the time, some banks complained that the new regulations would negatively affect their profits.
In contrast, the credit bureau has been widely welcomed by the market. We see the launch of the bureau as a positive step, says Murray Sims, general manager of personal banking at Commercial Bank of Dubai. It will ensure the customer does not become overly indebted. By seeing the full extent of the customers obligations, the bank can ensure the customer doesnt get into trouble.
It also helps banks comply with central bank directives on debt-to-service ratios, says Sims, as well as reducing the risk of lenders being exposed to high volumes of costly loan defaults. Although the cost of borrowing is likely to rise for some consumers with bad credit history, others with healthy track records may find they can get cheaper loans.
The bureau is also expected to speed up decision-making, as it will provide lenders with quick access to credit information that would have previously needed to be gathered manually from scratch.
Inevitably, as the bureau starts up, there is likely to be a rise in rejected loan or credit card applications as negative credit histories come to light. This could affect consumer spending and in turn economic growth if credit card approvals slow. There is some possibility this might have an initial short-term impact but in the long term, it will free up credit, says Sims.
Mohsin Nathani, CEO for the UAE at Standard Chartered bank, is equally optimistic that the negative impact is a burden worth bearing. We will go through a period when approvals will slow down and there will be higher rejections. But thats good for the industry, he told reporters in August.
It seems widely accepted that the bureau is a welcome development for banks, with many comparisons drawn to other countries that have already set up their own credit agency, including Singapore and Saudi Arabia.
In both those cases, loan defaults have generally declined over the long term, even if lending volumes have not, suggesting that a credit bureau is an essential building block for a stable banking sector.